Unit 3

Heads of Income

Q1) What are the different heads of income? (5 Marks)

A1) The different heads of income are:

1. Income from salaries.
2. Income from House Property.
3. Profits and gains from Business and Profession.
4. Income from Capital Gains.
5. Income from other sources.

Q2) What is salary? (5 Marks)

A2) The meaning of the term ‘salary’ for purpose of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term ‘salary’ for the purpose of Income-tax Act will include both monetary payments as well as non-monetary facilities like housing accommodation etc.

Salary as defined u/s 17(1) of the Income Tax Act, 1961, which includes:

1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any fees, commission, perquisites or profits in lieu of or in
5. Addition to any salary or wages;
6. Any advance of salary;
7. Any payment received by an employee in respect of any period of leave not availed by him.
8. The portion of the annual accretion in any previous year to the balance of the credit of an employee participating in a recognised provident fund to the extent it is taxable, and
9. Transferred balance in a recognised provident fund to the extent it is taxable.
10. The contribution made by the central government or any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD.

Q3) Mr. Anwar, employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2019-20. He receives a Basic Salary of Rs 25,000 monthly along with DA of Rs 2000, which forms a part of the salary. He also receives a HRA of Rs 1 lakh from his employer during the year.
Find the HRA component that would be exempt from income tax during the FY 2019-20. (5 Marks)

A3)

Therefore, the entire HRA received from the employer is exempt from income tax.

Q4) What are perquisites? (5 Marks) (2018, 19)

A4) Perquisites are facilities provided to an employee instead of money from an employer for official or personal benefits.

The word ‘Perquisites’ in the ordinary sense means any casual emolument attached to an office. Or position in addition to salary or wages. It may take various forms. It is a gain or profit which incidentally arises from employment in addition to regular salary or wages. A perquisite is something which arises by reason of a personal advantage. Under the general law, benefit which is not convertible into money is treated as a perquisite. Rent free accommodation and free educational facilities for children provided by the employer are examples of benefits not convertible into money as they are not saleable. But the income-tax law does not recognise such a distinction. For income-tax purposes, it is immaterial whether perquisites are voluntary or obligatory. Perquisites are to be discussed in 3 parts:

1. Perquisites taxable for all Employees.
2. Perquisites taxable for Specific Employees.
3. Perquisites which are Exempt.

Q5) How do you compute Income from House Property?  (8 Marks) (2019)

A5) Computation of Income from House Property

Q6) How do you compute Long Term Capital Gains? (5 Marks) (2019)

A6) Computation of Long Term Capital Gains (LTCG)

Note: No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax.

The meaning of terms used in the computation:

Indexed cost of acquisition

“Indexed cost of acquisition” means the ‘cost of acquisition’ (as discussed in case of short term capital gain) adjusted according to the price level of the year of sale. As per explanation to sec.48, “Indexed cost of acquisition” is an amount which bears to the ‘cost of acquisition’ the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on 1/4/2001, whichever is later.

Q7) Who is a specified employee? (5 Marks)

A7) ** Specified Employee [Section 17(2)(iii)]:

An employee shall be a specified employee, if he falls under any of the following three categories:

1. He is a Director of a company; or
2. He, i.e., the employee, has a substantial interest in the company. As per section 2(32), person who has a substantial interest in the company, in relation to a company means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power; Here the word beneficial owner is significant. It means that even if a person is not a registered holder of shares in a company but has beneficial interest in such shares, he shall be covered by this definition and conversely, even if a person is a registered holders of shares but has no beneficial interest in such shares, he shall not be covered by this definition. Thus, the beneficial ownership is the criterion under this definition.
3. His income under the head 'Salaries' (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000. Income, for this purpose, shall include all taxable monetary payments like basic salary, dearness allowance, bonus, commission, taxable allowances/perquisites but shall not include the value of any non-monetary benefits/perquisites. The following are to be deducted from salary for this purpose:
   1. Entertainment allowance (to the extent deductible under section 16(ii);
   2. Tax on employment [Section 16(iii)].

Q8) Which are the perquisites taxable for all employees? (5 Marks)

A8) Perquisites taxable for all Employees

The following perquisites are taxable in the hands of all employees:

1. Rent free accommodation provided by the employer to the employee. Such accommodation may be furnished or unfurnished.
2. Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee.
3. Any sum paid by the employer in discharging the monetary obligation of the employee which otherwise would have been payable by the employee e.g., the school fees of the children of the employee paid by the employer or the Income-tax of the employee paid by the employer.
4. Any sum payable by the employer whether directly or through a fund (other than recognized provident fund (RPF), Approved Superannuation Fund or Deposit Linked Insurance Fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity.
5. The value of any other fringe benefit or amenity as may be prescribed.
6. Specified security or sweat equity shares allotted or transferred by the employer to the assessee.
7. Contribution by the employer to the approved superannuation fund in respect of assessee to the extent it exceeds Rs. 1,50,000.

Q9) Which are the perquisites taxable for specified employees? (8 Marks)

A9) Perquisites taxable for Specified Employees

All monetary obligations of the employee discharged by the employer are perquisites which are taxable in the hands of all employees. But sometimes the employer, instead of making the payment in respect of such monetary obligations or reimbursing such amount to the employee, provides the perquisite in the form of a facility to the employee. Such facility will be a perquisite only for specified employees mentioned in section 17(2)(iii).

For example:

• If a watchman/sweeper is engaged by the employee and his wages are reimbursed/paid by the employer, it is a perquisite for all employees because it is the duty of the employee to pay the salary of his watchman/sweeper.
• On the other hand, if the watchman/sweeper is engaged by the employer and facility of his services is provided to the employee, it will be a perquisite only for specified employees.
• Similarly, if a motor car is provided by the employer to the employee for his personal use it shall be taxable perquisite in case of a specified employee only. Whereas if the car belongs to employee but expenses relating to personal use of such car are paid or reimbursed by the employer, it shall be a taxable perquisite in the hands of all employees, whether specified or not.
• Any benefit/amenity in the form of a facility (other than rent free accommodation, concession in the matter of rent or fringe benefits or amenities as may be prescribed) provided by the employer, which is not tax-free, shall be taxable only in the hands of specified employees. Some of these are:
  1. Services of a sweeper, gardener, watchman or personal attendant,
  2. Free or concessional use of gas, electric energy and water for household consumption,
  3. Free or concessional educational facilities,
  4. Use of motor car,
  5. Personal or private journey provided free of cost or at concessional rate to an employee or member of his household,
  6. The value of any other benefit or amenity, service, right or privilege provided by the employer.
• If the above perquisites are provided in 'Money' (monetary terms) whether by way of reimbursement of expenses incurred by the employee for such facilities or by way of payment on behalf of employee, these perquisites shall be taxable in case of all employees e.g., if the school fees of the children of the employee is reimbursed to him or paid on his behalf to the school, such amount shall be perquisite in case of all employees. On the other hand, if the children of the employee are studying in a school maintained by the employer, the education facility provided is not in money but in kind and it shall be perquisite only for specified employees.
• Similarly, if the personal gas bills of the employee are in the name of employee and the employer reimburses the amount of such gas bills to him or pays on his behalf to the gas agency, it is in monetary terms and taxable in case of all employees; on the other hand, if such bills are in the name of employer, it will be perquisite in case of specified employee only.

Q10) How to compute Gross Annual Value of house property? (5 Marks)

A10) Computation of Gross Annual Value

Step 1: Calculate reasonable expected rent (RER) of the property being higher of the following:

a) Gross Municipal Value.

b) Fair Rent of the property.

Note: RER cannot exceed Standard Rent.

* Reasonable Expected Rent (RER) is also known as Annual Letting Value (ALV).

Step 2: Calculate Actual Rent Received or Receivable (ARR) for the year less current year unrealised rent (UR) subject to certain conditions#.

#Unrealised Rent [Rule 4]: Unrealised Rent of current year shall be deducted in full from Actual Rent Receivable, provided the following conditions are satisfied:

i)    The tenancy is bona fide;

Ii)  The defaulting tenant has vacated the property or steps have been taken to compel him to vacate the property;

Iii)    The defaulting tenant is not in occupation of any other property of the assessee;

Iv)     The assessee has taken all reasonable steps to institute legal proceeding for the recovery of the unpaid rent.

Or has satisfied the Assessing Officer that legal proceedings would be worthless.

Step 3: Compare the values calculated in step 1 and step 2 and take the higher one.

Step 4: Where there is vacancy and owing to such vacancy the ‘ARR – UR’ is less than the RER, then ‘ARR - UR’ computed in step 2 will be treated as GAV.

Q11) Find out the gross annual value in respect of the following properties

Particulars          H1  H2  H3

Gross Municipal value        150  180  120

Fair rent          140  140  240

Standard rent         120  240  300

Actual rent if property is let out throughout the previous year  180  300  150

Unrealised rent of the previous year      25  40   20

Unrealised rent of the year prior to the previous year    30  50   60

Period when the property remains vacant (in number of months) 3      1     

(5 Marks)

A11)

Working:

1. Actual Rent received/receivable= ARR-Unrealised Rent

H1= (180/12 x 9) – 25 = 110

H2= (300/12 x 11) – 40 = 235

H3= 150 – 20 = 130

2.   In H1, till step 3 ARR is less than RER due to vacancy [otherwise ARR would have been Rs 1,55,000 (being Rs 1,80,000 – Rs 25,000). Therefore, GAV will be the ARR computed in step 2.

In H3 there is no vacancy hence step 3 gives GAV.

Q12) What are the Incomes chargeable under the head Profits & Gains from Business & Profession? (8 Marks) (2019)

A12) Income chargeable under the head Profits & Gains from Business & Profession

Sec. 28 enlists the incomes, which are taxable under the head ‘Profits & gains of business or profession’:

1. Profits & gains of any business or profession [Sec. 28 (i)]: Any income from business or profession including income from speculative transaction shall be taxable under this head.

2. Compensation to Management agency [Sec. 28 (ii)]: Any compensation/other payment due to or received

3. Income of trade or professional association’s [Sec. 28 (iii)]: Income derived by a trade, professional or similar association from rendering specific services to its members shall be taxable under this head.

Note: This is an exception to the general principle that a surplus of mutual association cannot be taxed.

4. Export incentive [Sec. 28 (iiia) (iiib) & (iiic)]: An export incentive in form of -

• Profit on sale of import license or duty entitlement pass book. [Sec. 28(iiia)/(iiid)/(iiie)]
• Cash assistance received/receivable by an exporter under a scheme of the Government of India [Sec. 28(iiib)]
• Duty draw back (received/receivable) for export e.g., Excise duty drawback, etc. [Sec. 28(iiic)]

5. Perquisite from business or profession [Sec. 28 (iv)]: The value of any benefit or perquisite, whether convertible into money or not, arising from business or profession shall be taxable under this head.

Examples: If an authorized dealer of a company receives a car (over and above his commission) from the company on achieving sale-target then market value of such car shall be taxable under the head ‘Profits & gains of business or profession’.

6. Remuneration to partner [Sec. 28 (v)]: Any interest salary, bonus, commission or remuneration received by a partner from the firm (or Limited Liability Partnership) shall be taxable as business income in the hands of the partner to the extent allowed in hands of firm (or Limited Liability Partnership) u/s 40(b).

7. Amount received or receivable for certain agreement [Sec. 28 (va)]: Any sum, whether received or receivable in cash or in kind, under an agreement for -

• Not carrying out any activity in relation to any business or profession; or
• Not sharing any know-how, patent, copyright, trade mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provisions for services.

Exceptions: The aforesaid provision is not applicable in respect of the following:

a. any sum received or receivable in cash or in kind on account of transfer of the right to manufacture, produce or process any article or thing; or right to carry on any business or profession, which is chargeable under the head Capital gains;

b. any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone Layer under the United Nation Environment Programme, in accordance with the terms of agreement (whether or not in writing, whether or not intended to be enforceable by legal proceedings) entered into with the Government of India.

8. Keyman Insurance Policy [Sec. 28 (vi)]: Any sum received under a Keyman Insurance Policy including bonus on such policy. As per sec. 10(10D) Keyman insurance policy is a life insurance policy taken by a person on the life of another person who is or was -

• An employee of the first mentioned person; or
• In any manner whatsoever connected with the business of the first mentioned person.

And includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration

9. Conversion of stock into capital asset [Sec. 28 (via)]: The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset.

10. Recovery against certain capital assets covered u/s 35AD [Sec. 28 (vii)]: Any sum received or receivable (in cash or kind) on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as deduction u/s 35AD.

Q13) What are the different allowances and their taxability? (12 Marks)

A13) Allowances and their taxability

Allowance is a fixed sum of money received by the employee from an employer to meet their official or personal expenses.

Allowances is defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. Under the Act, it is taxable under Section 15 on ‘due’ or ‘receipt’ basis, irrespective of the fact that it is paid in addition to or in lieu of salary.

1. Dearness Allowance:

In layman terms, dearness allowance is defined as the cost of living adjustment allowance which the government offers to public sector employees, as well as pensioners of the same. Dearness Allowance is a component of the salary which is applicable to employees in India.

Basically, Dearness Allowance is understood as a component of salary which is a fixed percentage of an employee’s basic salary, which aims to hedge the impact of inflation. Since, this allowance is related to the cost of living, the Dearness Allowance component differs for various employees based on their location. This implies that Dearness Allowance is different for employees working in the urban sector, semi-urban sector and the rural sector.

It is Fully Taxable

2.  House Rent Allowance (HRA)

The allowance is for expenses related to rented accommodation.

1. If the employee does not live-in rented accommodation, this allowance is fully taxable.
2. But if Employee lives in a rented accommodation, the deduction is as follows:

Least of-

• Actual HRA received or
• 50% of [basic salary + DA] for those living in *metro cities (40% for non-metros); or
• Actual rent paid less (10% of basic salary + DA)

*Metro Cities- Delhi, Mumbai, Chennai & Bangalore

Illustration:

Mr. Anwar, employed in Delhi, has taken up an accommodation on rent for which he pays a monthly rent of Rs 15,000 during the Financial Year (FY) 2019-20. He receives a Basic Salary of Rs 25,000 monthly along with DA of Rs 2000, which forms a part of the salary. He also receives a HRA of Rs 1 lakh from his employer during the year.
Let us understand the HRA component that would be exempt from income tax during the FY 2019-20.

Solution:

Therefore, in the above example, the entire HRA received from the employer is exempt from income tax.

3.  Entertainment Allowance:

It is Taxable for all employees. But Government Employees have a deduction for this allowance under section 16(ii) which is as follows:

Deduction for Govt Employees u/s 16 is least of the following:

• Actual Amount received
• 1/5th of Basic Salary
• Rs 5,000

4.  Leave Travel Allowance (LTA):

Employees who receive LTA from their employers can claim exemption. An employee, here, can be an Indian or foreigner.
However, this exemption is subject to the following rules:
1. The exemption is available on 2 journeys in one block of 4 years.
2. The amount of exemption available is lower of the actual amount spent to reach the destination via shortest route or the amount received from the employer.
3. To claim exemption, the cost of reaching the destination can be taken as A/C first class (for railways) or economy class of national carrier (for air travel).
4. Exemption is allowed only if actual expenditure has been incurred for travelling anywhere in India.

5.  City Compensatory Allowance:

This is one of the common components of salary structure. It is similar to DA as it is offered to employees to compensate for high cost of living in cities. Just like DA, it is also fully taxable in an employee's hands.

6.  Special Allowance:

Any Allowance received by an employee which does not fall under any other allowances head, is fully taxable in his/her hands.

7.  Overtime Allowance:

Some employers compensate for the overtime done by their employees. This allowance is taxable in the employee's hands.

8.  Children Education Allowance & Children Hostel Allowance:

Children Education Allowance is exempt upto Rs 100 per month per child up to a maximum of 2 children.

Children Hostel Allowance is exempt upto Rs 300 per month per child up to a maximum of 2 children.

9.  Conveyance Allowance/Transport Allowance/ Medical Reimbursement

• Both these allowances were available till FY 2017-18. However, from FY 2018-19, standard deduction of Rs 40,000 has been introduced in lieu of transport allowance and medical reimbursements.
• If employees were receiving transport allowance from their employer till FY 2017-18, as a taxpayer, they can claim up to Rs 1,600 per month or Rs 19,200 per annum as exempt from tax before arriving at gross income chargeable to tax. In case of blind, deaf, or handicapped employees, the exemption limit is Rs 3,200 per month.
• This allowance does not require employees to submit bills to employer for claiming it. However, there is a caveat to this benefit. This exemption can only be availed if no free conveyance is provided by the employer.
• Similarly, any reimbursement given by an employer to his/her employee for any medical expenditure incurred for himself / herself or family can be claimed as exempt from tax up to Rs 15, 000 annually till FY 2017-18. However, exemption was available only if you submit actual bills to your employer.
• Hence these allowances are fully taxable.

10.   Fixed Medical Allowance: Fully Taxable

Q14) What are the perquisites that are exempted from tax for all employees? (12 Marks) (2019)

A14)

Perquisites Exempted from Tax for all Employees and Not Added in Salary Income

1. Medical facility:

The value of any medical treatment provided to an employee or any member of his family in a hospital, dispensary or a nursing home maintained by the employer shall be a tax free perquisite.

2.  Recreational facilities:

Any recreational facility provided to a group of employees (not being restricted to a select few employees) by the employer is not taxable.

3.  Training of employees:

Any expenditure incurred by the employer, for providing training to the employees or by way of payment of fees of refresher courses attended by the employees.

4.  Use of health club, sports and similar facilities provided uniformly to all employees by the employer.

5.  Expenses on telephone, including a mobile phone, actually incurred on behalf of the employee by the employer.

6.  Employer's contribution: Employer's contribution to superannuation fund of the employee or provided such contribution does not exceed Rs1,50,000 per employee per year.

7.  The premium paid by the employer on an accident policy taken out by it in respect of the employee would not be a perquisite.

8.  Amount given by employer of assessee to assessee's child as scholarship is exempt under section 10(16).

9.  Food and beverages provided to employees:

The following shall be a tax free perquisite in the hands of the employees—

1. Free food and non-alcoholic beverages provided by the employer to his employees during working hours:

1. At office or business premises or
2. Through paid vouchers which are not transferable and usable only at eating joints. Provided the value of such meal is upto ₹50 per meal.

b.    Any tea or snacks provided during working hours.

c.    Free food and non-alcoholic beverages during working hours provided in a remote area or on offshore installation.

10.   Loans to employees:

In the following cases the value of benefit to the assessee resulting from the provision of interest free or concessional loan shall be nil:

1. Where the amount of loans are petty, not exceeding in the aggregate Rs 20,000;
2. Loans made available for medical treatment in respect of diseases specified in rule 3A of the Income-tax Rules. However, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

11.   Perquisites provided outside India:

Perquisites provided by the Government to its employees, who are citizens of India for rendering services outside India, are not taxable. [Section 10(7)]

12.   Rent free House/Conveyance facility:

Rent free official residence and conveyance facilities provided to a Judge of the Supreme Court/High Court is not a taxable perquisite.

13.   Residence to officials of Parliament, etc.

14.   Rent free furnished residence (including maintenance thereof) provided to an officer of the Parliament, a Union Minister or Leader of Opposition in Parliament is not a taxable perquisite.

15.   Accommodation in a remote area:

The accommodation provided by the employer shall be a tax free perquisite if the accommodation is provided to an employee working at mining site or an onshore oil exploration site or a project execution site, or a dam site or a power generation site or an offshore site which—

1. Being of a temporary nature and having plinth area not exceeding 800 square feet, is located not less than eight kilometres away from the local limits of any municipality or a cantonment board; or
2. Is located in a remote area.

16.   Educational facility for children of the employee:

Where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, there shall be no perquisite value if the cost of such education or the value of such benefit per child does not exceed Rs 1,000 p.m.

17.   Use by the employee or any member of his household of laptops and computers belonging to the employer or hired by him.

18.   Leave Travel Concession

19.   Tax paid by the employer on non-monetary perquisites:

Tax paid by the employer on nonmonetary perquisites of the employee shall be exempt in the hands of the employee. [Section 10(10CC)]

Q15) What are the conditions to be satisfied for an income to be income from house property? (5 Marks)

A15) The following three conditions should be satisfied for an income to be Income from House Property:

1. There should be a House Property.
2. Assesses is the Owner (Legal Owner or Beneficial Owner or Deemed Owner) of such House Property.
3. Such house property is not used for the purpose of Business by the owner/assessee.

Letting out property for promotion of own business –vs.- Business of letting out the property

Assessee lets out the property for the promotion of its own business or profession:

If an assessee carries on business or profession in his own house property or lets out the property for smooth running of his business or profession, income from such property is taxable under the head "Profits & gains of business or profession".

Assessee is engaged in the business of letting out of the property:

If an assessee is running a business with main object of buying & developing house properties either to let out or to sell such properties, then annual value of such house properties shall be taxable under the head "Income from house property". However, profit on scale of house shall be taxable under the head Profits & gains of business or profession.

Q16) What income from house properties are exempted from tax? (5 Marks)

A16) Income from the following house properties are exempted from tax:

1. Any one palace or part thereof of an ex-ruler, provided the same is not let out [Sec. 10(19A)].

Tax point: If the ex-ruler has a house property and the part of which is self-occupied and remaining let out then only the self occupied part of the house property shall be exempted.

2. House property of a local authority [Sec. 10(20)].

3. House property of an approved scientific research association [Sec. 10(21)].

4. House property of an educational institution [Sec. 10(23C)].

5. House property of a hospital [Sec. 10(23C)].

6. House property of a person being resident of Ladakh [Sec. 10(26A)]

7. House property of a political party [Sec. 13A]

8. House property of a trade union [Sec. 10(24)]

9. A farm house [Sec. 10(1)]

10. House property held for charitable purpose [Sec. 11]

11. House property used for own business or profession [Sec. 22]

Q17) What are the deductions available under Sec. 24 from income from house property? (8 Marks)

A17) Deduction under Section 24

1. Standard Deduction u/s 24(a): 30% of the net annual value is allowed as standard deduction in respect of all expenditures (other than interest on borrowed capital) irrespective of the actual expenditure incurred.

Note: Where NAV is negative or zero, standard deduction u/s 24(a) is not available.

2.  Interest on loan or borrowed capital u/s 24(b): Interest payable on amount borrowed for the purpose of purchase, construction, renovation, repairing, extension, renewal or reconstruction of house property can be claimed as deduction on accrual basis.

For the purpose of calculation, interest on loan is divided into two parts:

1. Interest for Pre Construction Period
2. Interest of Previous Year (i.e., can also be regarded as Post Construction)

1. Interest for Pre Construction Period

Pre-construction period means the period starting from the day of commencement of construction or the day of borrowing whichever is later and ending on March 31 immediately prior to the year of completion of construction.

Example: X has taken a loan on 1/4/1998 for construction of house property.  started on 1/6/2000 and completed on 17/8/2011. In such case, pre construction period will be a period starting from 1/6/2000 and ending on 31/3/2011.

Treatment: Interest for pre-construction period (to the extent it is not allowed as deduction under any other provisions of the Act) will be accumulated and claimed as deduction over a period of 5 continuous years in equal installments commencing from the year of completion of construction.

b.  Interest of Previous Year (i.e., can also be regarded as Post Construction)

Pre-construction period means the period starting from the beginning of the year in which construction is completed and continues until the loan is repaid.

Treatment: It can be fully claimed as deduction in the respective year(s). In the given example, post-construction period will start from 01/04/2011.

In nutshell, tax treatment is as under:

Other Points

1. Interest on borrowed capital is allowed on accrual basis even if the books of account are kept on cash basis.
2. Interest paid on fresh loan, which is taken to repay the original loan (being taken for above-mentioned purpose) shall be allowed as deduction.
3. Interest on new loan, taken for paying outstanding interest on old loan, is not deductible
4. Amount paid as brokerage or commission, for arrangement of the loan, is not deductible.
5. Interest on loan taken for payment of municipal tax, etc. is not allowed as deduction.

Q18) What are the provisions related to self occupied property? (8 Marks)

A18) As per sec. 23(2)(a), a house property shall be termed as self occupied property where such property or part thereof:

• Is in the occupation of the owner for the purposes of his own residence;
• Is not actually let out during the whole or any part of the previous year; and
• No other benefit there from is derived by the owner.

Treatment: The annual value of such house or part of the house shall be taken to be nil.

Note: If an assessee occupies more than one house property as self-occupied, he is allowed to treat only one house as self-occupied at his option. The remaining self-occupied house properties shall be treated as ‘Deemed to be let out’.

Tax Treatment of Self Occupied Property (already shown in computation table above)

Net Annual Value will always be NIL because there is no rental income from such property.

Deduction of Interest on Loan u/s 24 taken for such property is available as follows:

Summary of treatment of interest on loan:

Q19) Define’ Business’ and ‘Profession’ under Income Tax Act. (5 Marks)

A19) Business [Sec. 2(13)]

Business includes –

• Any trade, commerce or manufacture; or
• Any adventure or concern in the nature of trade, commerce or manufacture.

Generally, business means recurring economic activity, but for income tax purpose an isolated activity may be termed as business depending upon facts and circumstances. Following elements shall be considered to judge a transaction as business transaction:

• Nature of Commodity.
• Intention of the party.
• Efforts applied in transaction.
• Periodicity of transaction.
• Nature of transaction (whether incidental to a business or not).

Profession [Sec. 2(36)]

Profession includes vocation. Profession requires purely intellectual skill or manual skill on the basis of some special learning and qualification gathered through past training or experience e.g., chartered accountant, doctor, lawyer etc. Professional skill can be acquired only after patient study (in a particular system either a college, university or institute) and application (i.e., experience)

Vocation implies natural ability of a person to do some particular work e.g., singing, dancing, etc. The term “vocation” is different from the term “hobby”. Vocation must have the earning feature. It can be treated as an earning means by which a man passes his life. Unlike profession, vocation does not require a degree or special learning.

Notes

1. Profit Motive: If the motive of an activity is pleasure only, it shall not be treated as business activity.

2. Business v/s Profession: An income arising out of trade, commerce, manufacture, profession or vocation shall have the same treatment in Income tax Act. However, a little segregation is required to be made between business and profession while applying sec. 44AA, sec. 44AB, sec. 40AD, sec. 44ADA, etc.

Q20) What are the exclusions from total income under Sec 10 of the Income Tax Act? (12 Marks)

A20) Various categories of income are exempt from income tax under section 10. The assessee has to establish that his case clearly and squarely falls within the ambit of the said provisions of the act.

1. Agriculture Income:

We can still consider India is the country mostly depending upon the agriculture and income generated from the activities of agriculture. Agriculture income shall be excluded from the assessee total income (section 10, (1)) however, it shall be taken for considering rate to tax non-agriculture income.

2. Share of Profit from a Firm:

A partners share in the total income of the firm is totally exempted from the total income of the hands of the partner because firm is separately assess as such. However, any salary interest commission paid or payable to the partner which was deductible from the total income of the firm shall be included in the income of the partners total income as his business.

3. Leave Travel Concession:

If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then such reimbursement is fully exempted. But some provisions for it was as bellow;

1) Journey may be performed during service or after retirement.

2) Employer may be present or former.

3) Journey must be performed to any place within India.

4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of journey from the place of origin to the farthest point reached, by the shortest route.

5) Employee may or may not be a citizen of India.

6) Stay cost is not exempt.

4. Allowance or Perquisite Paid Outside India [Sec. 10(7)]:

Any allowance or perquisite paid outside India by the Government to a citizen of India for Rendering Services Outside India.

5. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10) deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g., Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

6. Compensation for Any Disaster [Sec. 10(10bc)]

Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.

7. Sum Received Under a Life Insurance Policy [Sec. 10(10d)]:

Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax. However, exemption is not available on – 1. Any sum received u/s 80DD (3) or u/s 80DDA (3); or 2. Any sum received under a Keyman insurance policy; or 3. Any sum received under an insurance policy issued on or after 1-4-20121 in respect of which the premium payable for any of the years during the term of the policy exceeds 10%2 of the actual capital sum assured.

8. Payment from National Pension Trust [Sec. 10(12a) & 10(12b)]:

Any payment from the National Pension Scheme Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)] Any payment from the National Pension System Trust to an employee under the pension scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount of contributions made by him [Sec. 10(12B)]

9. Payment from Approved Superannuation Fund [Sec. 10(13)]:

Any payment from an approved superannuation fund made – • on the death of a beneficiary; or • to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or • by way of refund of contributions on the death of a beneficiary; or • by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon. • by way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and notified by the Central Government.

10. Income of Mutual Fund [Sec. 10(23D)].

Any income of – a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made thereunder; b. A Mutual Fund set up by a public sector bank or a public financial institution or authorized by the Reserve Bank of India and subject to certain notified conditions.

11. Income of Business Trust [Sec 10(23FC)]:

Any income of a business trust by way of a) interest received or receivable from a special purpose vehicle; or b) dividend referred to in sec. 115-O (7) Ø “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration.

12. Income of Specified Boards [Sec. 10(29A)]:

Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products Export Development Authority and The Spices Board.

13. Subsidy Received from Tea Board [Sec. 10(30)]:

Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may specify, is exempt.

14. Awards and Rewards [Sec. 10(17A)].

Any payment made, whether in cash or in kind – a. In pursuance of any award instituted in the public interest by the Central Government or any State Government or by any other approved body; or b. As a reward by the Central Government or any State Government for approved purposes.

15. Income of Scientific Research Association [Sec. 10(21)]:

Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research association which has its object, undertaking research in social science or statistical research [being approved and notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association— a. Applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established; and b. Invest or deposit its funds in specified investments.

16. Expenditure Related to Exempted Income [Sec. 14A]:

For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable expenditure in accordance with the method prescribed by the CBDT.